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Crunch time for Theresa, oil bounces over production cut talk

European equity markets are mixed approaching the close, and politics is at the forefront of traders’ minds.

Europe

The anti-establishment parties in Italy have stuck to their guns, and are keen to press ahead and raise the budget deficit, and now they await the EU’s reaction. Continued pressure on Italian government bonds could spark a major debt crisis, which could easily spread across the region. The clock is ticking for Theresa May, as she needs to convince her cabinet, and then the majority of the House of Commons to back her draft agreement regarding the UK withdrawal from the EU. Judging by the speculation, there is widespread criticism of the draft, and it sounds like a difficult sell.

Flybe have been struggling for some time now, and today the airline announced it is considering selling-off units of the business, or even selling the company as a whole. First-half pre-tax profit and revenue dropped by 54% and 2.4% respectively. To make matters worse, the net debt position ticked up by 40%. The company’s cash flow has declined, and there is talk that two credit card processors are considering upping the cash collateral requirement – which would put even more pressure on the company. The firm’s valuation has dropped by 75% since March, so sentiment is clearly bearish.

Workspace shares are higher today after the real estate investment trust (REIT) announced robust first-half figures. Trading profit and rent increased by 20% and 17% respectively. The outlook was optimistic and the interim dividend was upped by 20%. The company’s well-located office space, and flexible contracts have proved to be popular with tenants. The firm is actually benefitting from Brexit, so some clients don’t want to sign-up for longer leases, and Workspace can accommodate them. The stock has been rallying for over two years, and if the bullish move continues it could target 1,100p

British Land revealed an underwhelming set of first-half figures. Underlying earnings fell by 14.6%. The company is too retail focused, and that is holding the company back. Roughly, 40% of the REIT’s assets are in the retail sector, and the rise of e-commerce has dented the industry. This year has seen turmoil on the high street, and British Land lost £14 million in relation to insolvency and administration agreements. The dividend was maintained for now, but in light of the share price performance in recent years, that might come under scrutiny. The share price has been in decline since 2015, and if the bearish move continues it might target 550p.

US

The major US indices are higher as sentiment has improved a little on Wall Street. The US-China trade dispute is still on going, but investors are looking forward to the G20 summit when the two heads of state will sit down and talk turkey.

Headline inflation ticked up to 2.5% in October – meeting forecasts, and the September report was 2.3%. The core reading slipped back to 2 1% from 2.2% .The latter reading is a far better indication of demand, as the headline figure was skewed higher by energy prices – which have slumped since then. The dip is actual demand is a bit of a worry, but it shouldn’t derail the Federal Reserve from their tightening path.

Apple is no longer the darling of the tech sector as Guggenheim cut the rating for the stock to neutral. UBS have trimmed their price target to $225, from $240. Traders are worried that we are at, or have already passed, peak iPhone.

FX

GBP/USD has seen a lot of volatility today given that Theresa May has drafted a Brexit withdrawal bill. There is a lot chatter that that the Prime Minister will find it difficult to get the draft approved. One news source claims that three cabinet ministers will resign today. It’s the same old story with Brexit, and while the uncertainty rumbles on, sterling will find it difficult to attract buyers.

EUR/USD is higher on the day, and the respectable growth figures from the eurozone, helped steady the euro. In the third-quarter, the currency bloc grew by 0.2% - meeting forecasts, but it is worth noting that the region grew by 0.4%. The German economy actually contracted by 0.2% in third-quarter, and this is concerning.

Commodities

Gold continues to dance around the $1,200 mark. The slightly negative move in the US dollar couldn’t push the metal higher, which is concerning given the strong negative relationship between the two markets in recent months. The commodity has been pushing lower since late October, and if it losses further ground, it might target $1,200.

Oil has bounced back today after it was reported that OPEC are considering cutting production by up to 1.4 million barrels. Last night WTI dropped over 7%, and Brent crude endured a severe sell-off too, so it comes as no surprise that the major oil producing nations are thinking about proposing a production cut at next month’s meeting.

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